Apple and five book publishers were using an agency sales model that raised the prices of e-books

The U.S. Department of Justice (DOJ) is planning to launch a lawsuit against Apple and five U.S. publishers for allegedly conspiring to raise e-book prices through an agency sales model.

Last December, the European Commission opened a formal antitrust investigation into whether five international e-book publishers had been practicing anti-competitive tactics with the help of Apple and its e-book store iBooks. Shortly after, the U.S. Justice Department climbed aboard the investigation as well.

After investigating the suspicious tactics, the DOJ has now warned Apple and the five book publishers that it plans to sue them for raising the prices of e-books. The five book publishers involved are Hachette Livre (Lagardère Publishing France), Harper Collins (News Corp., U.S.A.), Simon & Schuster (CBS Corp., U.S.A.), Penguin (Pearson Group, United Kingdom) and Verlagsgruppe Georg von Holzbrinck (owner of inter alia Macmillan, Germany).

Traditionally, publishers sell physical books to retailers for about half of the cover price, which is considered a wholesale model. Retailers then had the power to sell those books to customers for a lower price if they wanted to.

However, the e-book industry rocked this model and rubbed publishers the wrong way. Amazon started selling best sellers for as low as $9.99 in an effort to encourage Kindle sales. When Apple came along with iBooks, publishers were worried that the tech giant would take over the book industry the way it did the music industry with iTunes.

Apple then struck a deal with publishers in 2010, where they'd settle on an agency model instead. The agency model allowed publishers to set the price of the book and Apple would receive a 30 percent cut. However, publishers were not allowed to let rivals sell the same book for a lower price.

According to the DOJ, Apple and the five publishers did this to raise the prices of e-books, which violates federal antitrust laws. The publishers reacted to these claims, saying that the agency model was used to "enhance" competition in the e-book industry by helping e-book sellers to make some money out of the deal.

The DOJ isn't buying this excuse, though. The government is wondering how competition could have increased when prices were increasing.

Apple, the publishers and the DOJ are currently in talks regarding e-book prices. While the DOJ warned Apple and the publishers that it plans to sue them for allegedly conspiring to raise prices, some publishing executives associated with the talks have said that a settlement is being considered. Some solutions that have been passed around included the idea to keep the agency model, but allow booksellers to offer some discounts.

Apple has jumped heavily into the book selling and publishing business with the recent launch of iBooks 2, which is the sequel to the iBooks app that provides students with books they need as well as study features, and iBook Author, which is Mac software that allows textbook writers and publishers to create textbooks for the iPad.

Undoubtedly, e-books are an essential part of the iPad experience, and with the announcement of the iPad 3 release just yesterday, Apple likely wants to get this DOJ business figured out quickly.

Apple has never done anything in this arena (versus others we could name) to fix prices. (Think back to when Apple killed of the Mac gray market and killed the Mac clones. Some of those tactics were truly questionable.)

Apple just asked for a long standing legal concept of "Best Customer" for Apple's bookstore customers. Apple said, "Price it any way you want, just sell to our customers at the best price you give anyone else. No matter what that is we will take 30% (not the stereotypical 50%)." Apple just asked that Apple's bookstore customer be treated as the publishers' "Best Customer". And note that Apple did not ask for "Best Customer" treatment for themselves. Apple gets a flat 30%. The Apple bookstore customers get the "Best Customer" price. (In fact by insisting on the lowest price, Apple is actually *cutting* its profit.)

And, the publisher could have 9 different prices for 10 different avenues of sale. It's just that the bottom two with regard to price are whoever is at the bottom and Apple.

The U.S. Government itself very, very, very often invokes the "Best Customer" requirement. If you sell something to the U.S. Government you must give them the best terms, conditions and prices you give to anyone else. You can have 10 different prices, but the best terms and prices you give to anyone else must also be given to the U.S. Government.

Many, many companies over the years have invoked this concept in their business dealings. Apple is just saying that the publishers must do the same thing with regard to the customers shopping through its bookstore.

The DOJ may raise a stink about this, but in the end they will lose with regard to Apple. If there is collusion and price fixing among the publishers, the DOJ may win against them, but in this ONE case, Apple is fairly clean.

Apple started this mess by letting the publishers set the prices at an absolute level, with them taking a cut. It isn't about a best customer agreement, it's about the fact that other retailers *can't* change the pricing, even if they are taking the cut out of their profit.

For example, the publisher's set the price of a book at $10, they get $7, Apple gets $3. Amazon decides that they're OK with getting $2 per copy, and still giving the publishers $7, for a sale price of $9. This is how competition is supposed to work. Instead, the publishers said to charge the $10 price or they'll cut off all your books, you aren't allowed to go below the price floor for any reason. This is what the investigation is about.

Apple says that if you sell it to the *end customer* through Amazon for $9.00 then you must sell it to the *end customer* through Apple at $9.00.

It is up to the publisher to negotiate with Apple for something other than 30%. If Apple insists on 30% and the publisher does not like it then the publisher can either decide to sell that book through Apple or not.

Hell, all the publishers could walk away from Apple until Apple lowers its cut to 5%. Effectively that would kill Apple's bookstore as I doubt Apple would run the store on such thin margins. With Amazon and others out there, the direct impact to the publishers would be very small in the short term. They are just choosing to not put up a stink about Apple's 30% request. Why is Apple asking for 30%? Because that is what the major record labels agreed to for music. Apple just hit "copy and paste" on that.

And it's not true that other retailers "can't" change the pricing. It's that if they change the pricing to the end customer then Apple gets to sell it to the end customer at that lower price too.

Think of it as the exact opposite of price fixing.Apple sells the item for $10.00, the publisher gets $7.00 and Apple gets $3.00.The publisher lets another company sell that item for $9.00.Apple requires that the publisher allow Apple to sell it for $9.00 too. Then the publisher gets $6.30 and Apple gets $2.70 (unless the publisher gets Apple to take less). Apple gets less by going to the lower price too.

Where is the "price fixing"?

In your own words, "Apple started this mess by letting the publishers set the prices..." The publishers are setting the prices, not Apple.

Again, this has nothing to do with price fixing. The price to the end customer is always the best price available.

Finally, you state, "Instead, the publishers said to charge the $10 price or they'll cut off all your books, you aren't allowed to go below the price floor for any reason." This is the **Publishers** dictating prices, not Apple. If the publishers wanted to go to $0.99 or even FREE Apple would still sell their books.(As I understand, it there are lots of FREE books on the Apple store for which Apple's 30% is ZERO.)

quote: And it's not true that other retailers "can't" change the pricing. It's that if they change the pricing to the end customer then Apple gets to sell it to the end customer at that lower price too.

You were spot on until this comment. The agency pricing model and how it came to be is what is under question in this suit.

Under the agency pricing model, the retailer has ZERO control over the price. Amazon cannot change the sales price of a title that is priced using the agency model, else it would probably still take a loss on several titles to push more Kindles.

The price-fixing issue should probably be called pricing system collusion.

You are missing the point of business. Apple just wants to at least match others lowest price but retain 30% cut. what if Amazon only wants 20% cut. Why should the book stores charge Amazon more when Amazon only wants 20%. Apple is telling publishers you will charge every e book seller more than us if they choose a lower profit margine per ebook. Apple is setting the publishers prices to all others. That is the problem. That is a monopoly. You not only contractually control your price but contractually control all others. There is nothing wrong with asking a publisher to sell to you at the lowest price and increase your cut for whatever you want. this isn't the case they are setting retail prices for all not wholesale prices for themselves. the difference is obvious.